This article is for Irish company directors, startup founders, and shareholders who need to understand how share issuance works and whether they should keep or remove pre-emption rights.
If you're planning to issue new shares, raise investment, or wondering why your ownership percentage might get diluted, this guide covers what pre-emption rights are, how they protect shareholders, and when startups typically remove them to speed up fundraising.
Key Takeaways
• Irish companies have automatic statutory pre-emption rights unless specifically removed through their constitution or shareholder vote. • Most startups remove pre-emption rights early to avoid the mandatory 14-day offer period that slows fundraising rounds. • Issuing shares without following pre-emption rights allows shareholders to sue for damages and courts to cancel the issuance. • Check your constitution, shareholders' agreements, and past resolutions before any share issue to determine what rights exist. • Family businesses and equal partnerships should keep pre-emption rights to maintain control over who becomes a shareholder.
Do Irish companies automatically have pre-emption rights?
Yes, all Irish companies have pre-emption rights by default under the Companies Act. These rights are automatically built into law and give existing shareholders first chance to buy new shares before they're offered to outside investors. However, companies can remove these rights through their constitution or by shareholder vote.
What happens to my ownership if the company issues new shares without pre-emption rights?
Your ownership percentage gets diluted immediately without you having any say. For example, if you own 50 shares out of 100 total (50% ownership) and the company issues 100 new shares to an investor, you'll suddenly own only 50 out of 200 shares—dropping your ownership to 25%.
How long do I have to decide if I want to buy new shares under pre-emption rights?
You have at least 14 days to accept or decline the offer. The company must make the offer in writing and keep it open for this minimum period. After that, any shares you don't purchase can be sold to outside investors at the same price or higher.
Why do most startups remove pre-emption rights?
Startups remove them for speed and investor expectations—the mandatory 14-day waiting period slows down fundraising when competitors might close their deals faster. Venture capital investors expect these rights to be waived before they invest, and managing acceptances from multiple shareholders creates significant administrative work. It's become standard practice in startup term sheets.
Should I keep pre-emption rights if I'm not raising investment?
Yes, if you're not planning to fundraise, keep the default protection. There's no downside to the 14-day delay when you're not in competitive fundraising situations, and the rights protect you from unexpected dilution. Family businesses and equal partnerships especially benefit from keeping these rights to control who becomes a shareholder.
Do pre-emption rights apply to employee share schemes?
No, shares issued to employees under option schemes are typically exempt from pre-emption rights. Otherwise you'd have to offer every employee's shares to existing shareholders first, which would make employee equity impossible to administer. Most companies carve out this exception even when pre-emption rights exist.
What's the difference between pre-emption rights and right of first refusal?
Pre-emption rights apply when the company issues new shares, while right of first refusal applies when an existing shareholder wants to sell their shares. Most shareholder agreements include both to control new issuances and transfers separately.
What happens if directors issue shares without following pre-emption rights?
Affected shareholders can ask the court to cancel the share issuance and sue for damages caused by the dilution. Directors who authorized the breach can be personally liable, and investors who received the shares may find their ownership challenged later. This creates serious problems when you try to raise more funding or sell the company.
How do I check if my company has pre-emption rights?
Check three places: your constitution (look for sections about "issue of shares" or "pre-emption"), any shareholders' agreements (which might create additional rights), and past resolutions (which typically only applied to specific past issuances). If your constitution is silent on pre-emption, statutory rights apply automatically.
Can investors get pre-emption rights even if founders remove theirs?
Yes, this is actually the common practice—startups remove statutory pre-emption rights for founders to speed up fundraising, but then give investors contractual participation rights (called "pro-rata rights") in shareholders' agreements. This reflects that investors negotiate protections while founders prioritize speed, so rights are removed for founders but given to investors with more favorable terms.
